Your Small Business and Company Vehicles

Or what does first year bonus depreciation mean to small business owners.

The IRS recently released proposed regulations providing preliminary insight into the modifications of §168(k) per the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).

If just reading the description made you want to take a nap, try reading the several pages of regulations. We reviewed them and realized that they weren’t written for people who work for a living and don’t have the patience to slog through pages of legalese?

So, we decided to break it down into an example that most of our clients can relate to: company cars and trucks. Please note: These regulations impact most of the capital expenditures you make for business equipment; we’re using business use cars and trucks as examples.

If you use your car for business, this is what it means.

For both new and used passenger vehicles that are acquired and placed in service after 12/31/17 and used over 50% for business, the TCJA dramatically and permanently increases the so-called luxury auto depreciation allowances.

For vehicles placed in service in 2018, the maximum allowance in the first year is $10.000. But, if you claim first-year bonus depreciation for a new or used passenger vehicle, the TCJA increases the maximum first-year allowance by $8,000 (from $10,000 to $18,000 for 2018).

Under prior law, used vehicles were not eligible for first year depreciation, so this is a significant change. The only stipulation is that you can’t have previously owned or used the vehicle for either yourself or your business.

The $8,000 bump for bonus depreciation is scheduled to disappear after 2026, unless Congress takes further action.

Depreciation for the following years are:

$16,000 for Year 2

$9,600 for Year 3

$5,760 for Year 4 and thereafter until the vehicle is fully depreciated

(Also, these allowances will be indexed for inflation for 2019 and beyond.)

NOTE: You can claim the business depreciation if you use the vehicle at least 50% of the time, but if you don’t use the vehicle 100% for business, these allowances are reduced proportionately.

If you use a heavy SUV, pickup, or van for business the news is even better.

For tax purposes, if you use a heavy SUV, pickup, or van at least 50% of the time for business, it’s treated as transportation equipment rather than as a passenger vehicle. Therefore, it qualifies for 100% first-year bonus depreciation.

What’s a “heavy” SUV, pickup, or van?

100% first-year bonus depreciation is only available when an SUV, pickup, or van has at least a 6.000-pound manufacturer’s gross vehicle weight rating (GVWR). Examples of suitably heavy SUVs include Ford Explorer, Chevy Tahoe, Jeep Grand Cherokee, Nissan Armada, Toyota Sequoia, and similar SUVs. Pickups include the Ford F150, Chevy Silverado, Dodge Ram 1500, Nissan Titan, and Toyota Tundra, as well as other full-size pickups.

The TCJA allows unlimited 100% first-year bonus depreciation for qualifying new and used assets that are acquired and placed in service between 9/28/17 and 12/31/22. However, just as with cars, a used asset must be new to you or your business entity.

To put everything in perspective, if you buy a new heavy pickup this year for $60,000 and use it 100% for business, you can deduct the entire $60,000 in 2018. If you only use it 75% for business, the deduction will be $45,000 (75% of $60,000).

If you buy a used $45,000 heavy pickup and use it 100% for business, you can also deduct the entire cost in 2018. If you only use the vehicle 75% for business, your first-year bonus depreciation deduction is $33,750 (75% x $45,000).

These regulations are complicated enough that it would generally be a good idea to discuss planned equipment purchases with your CPA or tax advisor to make sure you will qualify for first year bonus depreciation.